Debate over student loan interest rate continues

Congress needs to make a decision by July 1, or interest rates on federal loans will double

Congress must make a decision about student loans by July 1, or interest rates on federal loans will double. (Photo: MGNOnline)

Bipartisan discussions are expected to begin today about how to prevent interest rates for federal student loans from doubling on July 1, but one local financial adviser is concerned about who will eventually pay for keeping the rates low.

“Politically speaking, it’s not favorable to increase the rates on student loans, but I don’t know how we’re going to pay for all of it,” Jayme O’Donnell, partner with Evergreen Advisors, said. “I’m just afraid our generation is going to foot the bill for all of this in the future.”

According to Reuters, both House and Senate members want to avoid increasing the interest rate because they don’t want to upset young voters before the November elections.

The increase would affect federally subsidized Stafford loans, which are provided to almost 7.5 million low- and moderate-income students nationwide each year.

But it’s unclear if or how Congress will pay for a one-year renewal of the current 3.4 percent rate, Reuters reported.

Without action by July 1, the rate could rise to 6.8 percent, which would mean more student debt.

The Associated Press reported that Congress could opt to pay the $6 million to keep the rates low with Social Security and Medicare payroll taxes from high-earning owners of private corporations.

Last week, higher education advocates said that an increase in interest rates would cost Tennessee $130 million a year.

“In today’s economy, students need a college education to get ahead,” Rich Williams, higher education advocate for U.S. PIRG, said. “Doubling the interest rate for student loans would make this goal harder to achieve for thousands of Tennesseans.”

U.S. PIRG, the federation of state public interest research groups, is a nonprofit, nonpartisan public interest advocacy organization.

O’Donnell compared the student loan interest rates to mortgage interest rates. She said that mortgage rates are low but are backed up by the collateral of the home.

The hope is that students get an education and that their “human capital” becomes more valuable, but there is no way to get money back if that doesn’t happen.

She said maybe the rate doesn’t need to be doubled, but it should be higher than mortgage interest rates.

“It stands to reason that you should have to pay more, [that] there should be a higher premium for an interest rate on a student loan than for a mortgage because there’s no collateral,” she said. “If they are going to go with variable interest rates, let them vary on the market, but they should always be more than mortgage rates. That’s the financial math of it.”

Updated @ 6:18 p.m. on 05/08/12 to change the name of the company from "Evergreen Financial Advisers" to "Evergreen Advisors."